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R 101406Z APR 07
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UNCLAS SECTION 01 OF 03 PARIS 001418 
 
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E.O. 12958: N/A 
TAGS: ECPS ETRD FR
SUBJECT: France Telecom's Transformational Strategy 
 
Not for Internet distribution 
 
Summary 
------- 
 
¶1. (SBU) On March 30, France Telecom (FT) executives told us that FT 
had to expand into new areas, both geographically and functionally, 
since telecom services were minimally profitable in France.  FT 
emphasized that value-added services delivered through broadband and 
mobile telephony would be the most profitable businesses in 
developed countries, while developing countries had greater yields 
in mobile telephony.  On services, FT has developed a new "triple 
play" offering, combining telephony with broadband Internet and 
television, under its well-known mobile telephone "Orange" brand. 
FT is building out its fiber network to offer high value services, 
such as video on demand.  Geographically, FT is putting more 
emphasis on growing its cellular business in higher-yielding 
emerging markets, such as Eastern Europe, Africa, and China. 
However, FT pointed out that that new European Commission 
recommendations forcing providers to share cutting-edge broadband 
infrastructure with rivals would slow down incumbents' investment in 
very high-speed internet by diminishing rates and profit margins. 
End Summary. 
 
¶2. (U) On March 30, France Telecom Senior Executive Vice President 
Louis-Pierre Wenes in charge of FT's transformation and French 
operations, and International Business Development Executive Vice 
President Anne Bouverot told econoffs that FT had to expand into new 
areas, both geographically and functionally.  Wenes noted that 
telephone penetration growth rate in the EU and U.S. was less than 
one percent.  Telecom services were minimally profitable in France. 
Market participants were providing minimal service in a bid to lower 
costs on razor-thin profits and gain market share.  While such a 
situation should drive consolidation between incumbent EU operators, 
member state politicians would not allow national champions to fall 
into foreign hands.  (Note:  This conversation took place before the 
press reported on AT&T and America Movil's bid for Telecom Italia. 
End note.) 
 
FT's Broadband Plan 
------------------- 
 
¶3. (U) Wenes said that FT has a huge data base of current and former 
customers, and the firm seeks to leverage that information by 
offering new content.  FT is targeting more than 12 million clients 
for broadband fixed-line connections by 2008, including more than 8 
million subscribers for its Livebox "triple play" offer.  With the 
Livebox, FT offers broadband internet access at 100 Mbps with Wi-Fi 
capability, unlimited telephone calls to fixed lines within France 
through Voice over Internet Protocol (VoIP), and a range of digital 
television channels.  FT expects more than 12 million customers by 
2008 for broadband mobile services (including third-generation 
services), with 6 million customers in France, another 5 million in 
the UK, and another million elsewhere.  FT is hoping to gain more 
than one million subscribers for MaLigne TV in France, its offering 
for television via the internet, with more than 400 million euros 
(USD 483 million) in revenue from direct paid content.  As of 
year-end 2006, FT was serving 5.9 million ADSL Orange customers in 
France for an estimated 49 percent share of the French broadband 
market. 
 
Internet Access: Margins Squeezed 
--------------------------------- 
 
4 (SBU) According to Wenes, French consumers are very interested in 
broadband triple play - and they enjoy the most advanced and 
competitive ADSL-based triple-play market in Western Europe.  FT had 
changed the branding of its internet offering from Wanadoo to Orange 
to capitalize on its better known mobile telephone brand name.  But 
Wenes wondered whether Orange would be able to make money on its 
triple-play offering, given that strong competition had pushed 
prices down and limited revenue growth.  Inexpensive "triple play" 
services, which average 30 euros a month, have helped push broadband 
adoption to more than 75 percent of all French Internet users - the 
highest in Western Europe. 
 
Fiber to the Home in Paris 
-------------------------- 
 
¶5. (U) FT has only recently stepped up its deployment of fiber to 
the home (FTTH).  By allowing other operators to access its fiber 
network, FT hopes to avoid the regulatory problems that have plagued 
 
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Deutsche Telekom AG (which requested a regulatory holiday on 
providing access to its fiber networks to recoup its investment 
costs).  Wenes confirmed that FT's early FTTH deployment phase would 
run from 2007 to 2008 in many cities, including Paris, Lyon, 
Marseille, Poitiers and Toulouse, with the aim of having 150,000 to 
200,000 customers connected by the end of 2008 out of a potential 
client base of one million.  Orange will be offering internet access 
with symmetrical speeds of up to 100 megabits/second, several 
high-definition TV channels, and unlimited calls.  He believes that 
within five years, French consumers would use this network to choose 
their own programs with the video on demand such bandwidth would 
allow.  According to Wenes, fourth generation mobile networks (4G) 
would cover the parts of France that fiber would not be able to 
reach.  He believed that 4G had more potential in France than either 
WiMAX or Wi-Fi. 
 
¶6. (SBU) Wenes and Bouverot argued that the current battle between 
Deutsche Telekom and the EU Commission over access to fiber networks 
does not bode well for investment in high-speed networks.  FT agrees 
with Deutsche Telekom's policy of exclusive access to help it recoup 
costs by selling new services, including internet protocol 
television (IPTV). At the same time, FT is aware that the idea of a 
"regulatory holiday" is "doomed" since the European Commission has 
threatened the German government with legal action over Deutsche 
Telekom's stance. 
 
¶7. (SBU) Wenes and Bouverot believe it is unwise of the European 
Commission to require former state-run monopolies to form separate 
companies to manage their service business and access to their 
infrastructure.  This would make investment unviable, particularly 
since the new investment was in fiber networks and not the old 
copper network.  The more the European Commission squeezed 
incumbents' profits through overzealous regulation, the less money 
they would invest in fiber networks and the slower the roll-out of 
new infrastructure and associated services.  Furthermore, they say, 
the European Commission proposals go in the opposite direction of 
U.S. policy, which encourages investment by removing obligations on 
telephone operators to share fiber networks with rivals for a period 
of time. 
 
Cellular Operations in Emerging Markets 
--------------------------------------- 
 
¶8. (U) FT, in addition to offering new services, wants to expand its 
businesses in markets with higher growth rates and yields.  It 
already has significant market share in various wireless markets, 
including the United Kingdom, Poland, Spain, Belgium, Egypt, 
Romania, Slovakia, and Moldavia.  Wenes expects that FT's wireless 
operations in mature markets such as the U.K., Spain, and France to 
continue to expand with the introduction of new higher-margin 3G 
services.  However, he stressed that the real driver of cellular 
growth over the next few years would come from the company's 
international assets in the fast-growing, emerging markets of 
Eastern Europe and Africa. 
 
¶9. (U) FT reported that its Eastern European subscriber base grew 
some 23 percent between 2005 and 2006, while Africa, the Middle East 
and other emerging markets recorded a 51 percent increase in 
customers. As a result, the company's cellular operations in nations 
such Poland, Slovakia, and Romania posted double-digit gains in 
revenue, a trend that is likely to continue for the foreseeable 
future.  Since growth was so much faster in these emerging markets, 
FT was not seeking to acquire any mobile telephony firms in the U.S. 
or EU. 
 
Looking to China 
---------------- 
 
¶10. (U) Orange is looking to invest in Asia in general and in China 
in particular.  The firm entered into a long-term Strategic 
Partnership with China in 2004 to cooperate in the research and 
development of technologies and applications, exchanging personnel 
and training Chinese staff. Last year, FT was the first foreign 
telecoms carrier to join the TD-SCDMA Forum, an industry group 
promoting China's homegrown standard for 3G mobile wireless 
services. 
 
¶11. (SBU) Wenes said that becoming a profitable player in the 
Chinese market was extremely difficult, but the market was "too big 
to ignore."  He noted that just five years ago, Chinese telephone 
equipment manufacturers were too saturated with domestic orders to 
respond to international orders in a timely way, and the equipment 
 
PARIS 00001418  003 OF 003 
 
 
did not use the latest technology.  Now, however, the Chinese were 
responding very rapidly, and their technology was among the best 
available.  Leading manufacturers could afford to staff their 
research laboratories with approximately 10,000 staff. 
 
¶12. (SBU) Wenes wondered how Western firms could compete with 
companies from a country that has three times as many people working 
in research and development as FT.  Western firms would have to 
consolidate and focus on certain technologies and products, and 
develop niche markets.  He predicted that as the automobile industry 
faces difficulties today, telecom equipment manufacturers would face 
difficulties in the future.  He predicted that each technology niche 
would have two to three manufacturers, and no more than four to five 
would operate in each line of production.  On the service side, he 
expected European incumbent operators would merge as soon as 
politically viable. 
 
Comment 
------- 
 
¶13. (SBU) Broadband growth in France, although more robust than 
elsewhere, has come at a price -- that of very poor customer 
service.  There are some 20,000 pending law suits against the major 
operators for shoddy practices and poor service. That number could 
rise very quickly as operators cut customer service costs to lower 
prices and gain market share.  FT believes customer service will be 
the next battleground, and it is one that FT is poised to win. 
 
Stapleton